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To Groupon or not to Groupon: The profitability of deep discounts

Author

Listed:
  • Benjamin Edelman

    () (Harvard Business School)

  • Sonia Jaffe

    () (Harvard University)

  • Scott Duke Kominers

    () (Harvard University)

Abstract

Abstract We examine the profitability and implications of online discount vouchers, a relatively new marketing tool that offers consumers large discounts when they prepay for participating firms’ goods and services. Within a model of repeat experience good purchase, we examine two mechanisms whereby a discount voucher service can benefit affiliated firms: price discrimination and advertising. For vouchers to provide successful price discrimination, the valuations of consumers with access to vouchers must generally be lower than those of consumers who do not have access to vouchers. Offering vouchers tends to be more profitable for firms that are patient or relatively unknown, and for firms with low marginal costs. Extensions to our model accommodate the possibilities of firm price reoptimization and multiple voucher purchases. We find potential benefits of online discount vouchers to certain firms in certain circumstances, but vouchers are likely to increase firm profits under relatively narrow conditions.

Suggested Citation

  • Benjamin Edelman & Sonia Jaffe & Scott Duke Kominers, 2016. "To Groupon or not to Groupon: The profitability of deep discounts," Marketing Letters, Springer, vol. 27(1), pages 39-53, March.
  • Handle: RePEc:kap:mktlet:v:27:y:2016:i:1:d:10.1007_s11002-014-9289-y
    DOI: 10.1007/s11002-014-9289-y
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Benjamin Edelman & Sonia Jaffe & Scott Duke Kominers, 2016. "To Groupon or not to Groupon: The profitability of deep discounts," Marketing Letters, Springer, vol. 27(1), pages 39-53, March.
    2. O. Loginova & A. Mantovani, 2015. "Information and Online Reviews," Working Papers wp996, Dipartimento Scienze Economiche, Universita' di Bologna.
    3. Oksana Loginova & Andrea Mantovani, 2015. "Price Competition in the Presence of a Web Aggregator," Working Papers 1616, Department of Economics, University of Missouri, revised 17 Aug 2016.
    4. repec:eee:joreco:v:40:y:2018:i:c:p:299-303 is not listed on IDEAS
    5. Francesca Magno & Fabiio Cassia & Marta Ugolini, 2014. "L’efficacia delle campagne di social couponing: uno studio tra i merchant di Groupon," MERCATI E COMPETITIVITÀ, FrancoAngeli Editore, vol. 2014(3), pages 41-63.
    6. Liang, Xiaoying & Ma, Lijun & Xie, Lei & Yan, Houmin, 2014. "The informational aspect of the group-buying mechanism," European Journal of Operational Research, Elsevier, vol. 234(1), pages 331-340.
    7. repec:gam:jsusta:v:10:y:2018:i:3:p:579-:d:133311 is not listed on IDEAS
    8. Laura Reinhart & Mary Kate Naatus, 2017. "Groupon, m-commerce and mobile apps: Perceptions of small business owners and consumers," Business & Entrepreneurship Journal, SCIENPRESS Ltd, vol. 6(1), pages 1-3.
    9. repec:eee:ejores:v:267:y:2018:i:2:p:612-627 is not listed on IDEAS
    10. repec:fan:mcmcmc:v:html10.3280/mc2017-002006 is not listed on IDEAS
    11. Wu, Chien-Wei & Chiu, Hsien-Hung, 2016. "Price Discrimination Through Group Buying," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 57(1), pages 27-52, June.
    12. Tran, Thanh & Desiraju, Ramarao, 2017. "Group-buying and channel coordination under asymmetric information," European Journal of Operational Research, Elsevier, vol. 256(1), pages 68-75.
    13. Amedeo Piolatto, 2015. "Online booking and information: competition and welfare consequences of review aggregators," Working Papers 2015/11, Institut d'Economia de Barcelona (IEB).

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